From UPSC perspective, the following things are important :
Prelims level : Act of God , Force Majeure clause
Mains level : Not Much
Amid disruptions caused by Covid-19, the Finance Minister has referred to an Act of God while businesses are looking at a legal provision, force majeure, to cut losses.
Note the key differences between the Act of God and Force Majeure.
Evoking “Act of God”
- The force majeure or “Act of God” clause has its origins in the Napoleonic Code.
- The finance ministry had issued an office memorandum inviting attention to the force majeure clause (FMC) in the 2017 Manual for Procurement of Goods issued by the Department of Expenditure.
- It clarified that the pandemic should be considered a case of natural calamity and FMC may be invoked, wherever considered appropriate.
What is a force majeure clause?
- The law of contracts is built around a fundamental norm that the parties must perform the contract.
- When a party fails to perform its part of the contract, the loss to the other party is made good.
- However, the law carves out exceptions when the performance of the contract becomes impossible for the parties.
- A force majeure clause is one such exception that releases the party of its obligations to an extent when events beyond their control take place and leave them unable to perform their part of the contract.
- FMC is a clause that is present in most commercial contracts and is a carefully drafted legal arrangement in the event of a crisis.
- When the clause is triggered, parties can decide to break from their obligations temporarily or permanently without necessarily breaching the contract.
- Companies in such situations use the clause as a safe exit route, sometimes in opportunistic ways, without having to incur the penalty of breaching the contract.
Difference between the two
- Both concepts elicit the same consequences in law.
- Generally, an “Act of God” is understood to include only natural unforeseen circumstances, whereas force majeure is wider in its ambit and includes both naturally occurring events and events that occur due to human intervention.
What situations legally qualify for use of force majeure?
- While some contracts have clauses with standard circumstances, some contracts would have specific circumstances that are more focused.
- For example, a shipping contract would have a force majeure clause that could cover a natural disaster like a tsunami.
- If an event is not described, then it is interpreted in a way that it falls in the same category of events that are described.
- An FMC is negotiated by parties, and events that could potentially hamper the performance of the contract are catalogued.
- It is not invoked just by expressing that an unforeseen event has occurred.
- In case a contract does not have a force majeure clause, there are some protections in common law that can be invoked by parties.
- For example, the Indian Contract Act, 1872 provides that a contract becomes void if it becomes impossible due to an event after the contract was signed that the party could not prevent.
Global precedents dealing with COVID-19 pandemic
- In China, where the Covid-19 outbreak originated, the Council for Promotion of International Trade is issuing force majeure certificates to businesses.
- China’s Supreme People’s Court had recognised the 2002 SARS outbreak as a force majeure event.
- Singapore enacted the Covid-19 (Temporary Measures) Act in April to provide relief to businesses that could not perform their contractual obligations due to the pandemic.
- The Paris Commercial Court in July ruled that the pandemic could be equated to a force majeure event.
- In the UK, the Financial Conduct Authority has brought in a test case before the High Court to look into business insurance contracts and interpret the standard wordings in such contracts.
- The International Chamber of Commerce has developed a Model Code on the force majeure clause reflecting current international practice.